The History of Black Monday – The Big Picture

Imagine the impact of markets losing a quarter of their value in one trading session

It was 35 years ago today: October 13mBlack Monday a/k/a 1987 Crash.

If you’re a relatively young investor, you may be unfamiliar with what happened that day or why. 87 The crash affected many market-related factors. We can trace much of today’s market structure to that event, and the changes that followed.

Consensus has focused on several key drivers in the coming years:

1. A very hot market: +42.5% for the first 3 quarters of the year;
2. Portfolio Insurance: A vicious feedback loop is created and downward pressure is added;
3. Index Futures Trading; Relatively new (1982) products allow wide and leveraged exposure;
4. NYSE infrastructure: Considered “broken”, overwhelmed by increasing volume, in desperate need of upgrade.

Like most major events, it was probably caused by a combination of factors – the four top candidates above. They created a unique set of circumstances that led to the largest one-day percentage decline in market history – a 22% drop in the Dow Jones Industrial Average.

A more difficult factor to measure was psychology: the secular bear market of 1966-1982 was still fresh in traders’ memories.1 Many doubted that the new bull market of 1982 had strength.

Even still, the Dow ended 1987 up 2.3%. For the full calendar year, the S&P 500 total return was +5.8%; The Nasdaq 100 lost -5.3%.

It was a unique but highly educational era; For anyone who wants to dive deep into history, Tim Metz Black Monday: The Catastrophe of October 19, 1987 … and Beyond – Highly recommended!

in the past:
Where were you on Black Monday? (October 19, 2015)

25th Anniversary of Black Monday 1987 Crash (October 19, 2012)

Art Cashin: Black Monday, An Unforgettable Singles Day (October 19, 2012)

1. It was a turbulent 17-year period with numerous rallies and sell-offs. Markets were little more than flat during that 16-year period. For the S&P500, the nominal return on investment was 54.6%. However, in real (inflation-adjusted) terms, they look quite different: add in the effects of rising CPI and your return drops to -49.7% or down to -3.96% per year.

That is without dividends; Including reinvested dividends and the return over that period was 206% — but the inflation-adjusted return was just 2.74%.

CPI and Dividend Calculation via DQYDJ:

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